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Hi,
I have 2 questions in regard to capitalisation of borrowing costs.
1) If an entity purchases an asset and takes up a 10-year loan payable by regular instalments, should the entire borrowing costs (i.e. Interest expense) for the entire 10 years be capitalised at the point it is ready for its intended use?
2) Where the borrowed funds obtained are not fully consumed in the expenditures on the qualifying asset, should the borrowing costs of the unused portion of funds that are temporarily invested be capitalised?
Thanks for taking the time.
Hello,
I do apologize for the multiple questions, and I hope you could provide some revelations on my opinion below:
In para 20 of IAS 23 provides that suspension shall be suspended during “extended periods” of active development interruption. However, the standards did not define what constitute extended periods.
However, it goes on in para 21 of IAS 23 which provides that: “An entity also does not suspend capitalising borrowing costs when a temporary delay is a necessary part of the process of getting an asset ready for its intended use or sale. For example, capitalisation continues during the extended period that high water levels delay construction of a bridge, if such high water levels are common during the construction period in the geographical region involved.”
The standard seems to suggest that delays due to acts of God or nature causes (e.g. inclement weather) are an exception to suspending capitalisation as they could be considered temporary delay and is a necessary part of the process of getting an asset ready for its intended use.
Insofar, answers in several source explained that the delays during inclement weather should be suspended. hence not the borrowing costs during the delay is not capitalised.
In my opinion, on the face of the standards, delays due to unexpected inclement weather should be considered an exception to suspending capitalisation of the borrowing costs, and that capitalisation should continue during this period.
I would greatly appreciate if you could provide any insights whether my interpretation is valid. Thanks.
1. Yes
2. YesCapitalisation would cease if there was an interruption.
No further knowledge really needed for exam purposes.
Sorry to bother you again.
Where the borrowed funds are not fully consumed but are not immediately invested.
The full amount of borrowing costs is capitalised and asset depreciated at the end of reporting period.
At the start of the next reporting period, the remaining funds are invested.As the investment income are deducted from the capitalised amount of an asset that has undergone depreciation, would the additional depreciation be reversed? How should it be accounted for?
ALL ANSWERS ARE EXAM PURPOSES ONLY (AS ALWAYS) 🙂
Two distinct stages:
Stage 1
Build asset
End of Stage 1 – asset complete – there will be no further adjustments to CA of asset / capitalisation of interest
Stage 2
Start to depreciate
Does that mean future investment income from the unused portion of borrowing (in relation to asset) will be treated as income in P/L instead?
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